Credit Acceptance Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are against December 31, 2012. Amounts are in millions except per-share data. Credit Acceptance provides dealer financing for vehicle purchases by consumers with impaired or limited credit histories, principally through its Portfolio Program.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $172.7 | $155.7 | $506.8 | $449.9 |
| Income before taxes | $102.2 | $83.8 | $294.7 | $251.8 |
| Net income | $65.1 | $52.9 | $187.2 | $159.8 |
| Diluted EPS | $2.75 | $2.12 | $7.78 | $6.22 |
| Operating cash flow | — | $221.4 | $218.5 |
Q3 revenue increased 10.9% and net income 23.1%; nine-month revenue increased 12.6% and net income 17.1%. Net margin, calculated as net income divided by revenue, was approximately 37.7% versus 34.0% in Q3 and 36.9% versus 35.5% for the nine-month periods. Finance charges were $148.7 in Q3 and $439.1 for nine months. Average net loans receivable rose to $2,128.8 in Q3 and $2,053.5 for nine months, while average portfolio yields declined to 27.9% and 28.5%, respectively.
For nine months, investing activities used $281.4, principally reflecting $1,048.0 in dealer advances and $90.2 in purchased loans, partly offset by $1,008.4 in loan collections. Financing activities provided $54.6, including $127.2 used for share repurchases. Cash and cash equivalents were $3.6 at September 30, down from $9.0 at year-end; restricted cash was $116.2.
Balance sheet, debt and liquidity
Total assets were $2,385.2, up from $2,133.2 at December 31, 2012. Net loans receivable increased to $2,163.4 from $1,933.5; the credit-loss allowance was $190.9, up from $176.4. Total liabilities were $1,695.4 and shareholders’ equity was $689.8.
Balance-sheet debt totaled $1,434.0, up $183.2 from $1,250.8; funded debt to equity was 2.1:1. Debt included $992.4 in secured financing, $87.6 on the revolving secured line, and $350.2 in senior notes. The company reported $147.4 available on its $235.0 revolving line; borrowing availability on other facilities is subject to collateral and borrowing-base limits. Management said operating cash flows and financing alternatives were expected to fund maturities and operations, but warned that reduced access to funding could materially harm liquidity. All reported debt covenants were met at quarter-end.
Material changes and management commentary
- Growth in average loan balances was the principal driver of higher finance charges and earnings. Lower average yields—attributed mainly to higher advance rates on new assignments—partly offset that growth.
- Q3 consumer-loan assignments increased 11.0% by units and 15.9% by dollars year over year. Active dealers rose 18.0%, while average volume per active dealer fell 6.0%; management cited increased competition. For nine months, unit volume rose 4.7% and active dealers rose 22.1%, while average volume per active dealer declined 14.1%.
- Other income rose 81.7% in Q3 and 71.7% for nine months, mainly from vehicle-service-contract profit sharing, GPS/starter-interrupt-device fees, and dealer support products and services.
- Q3 credit-loss provision decreased to $6.1 from $9.8; the nine-month provision was $17.3 versus $17.8. Overall loan performance exceeded management’s expectations at the start of both 2013 periods, although certain loan pools underperformed.
- In Q2, a revised collections-forecasting methodology using more recent data, different segmentations and new variables increased the provision by $3.0 and reduced Q2 net income by $2.1. Forecasted collection results remained notably below initial estimates for 2006 and 2007 assignment vintages; newer vintages have less realized performance and greater forecast uncertainty.
- Debt financing changes included extensions to the revolving credit line and Warehouse Facility IV. The company completed a $140.3 Term ABS financing in Q2 and expected to complete a further $197.8 financing, subject to customary conditions, with an expected October 31, 2013 closing. This is an expectation, not a completed transaction in the reported period.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management identifies access to capital, accurate forecasting of future collections, and maintaining loan volume at anticipated levels as key success factors. Risks include the high-risk borrower population and uncertainty in collection estimates; competition; substantial debt, refinancing and interest-rate exposure; reliance on continued capital-market access; regulatory and economic changes; and potential litigation. The company uses interest-rate caps for warehouse exposure and reported no material change in market-risk disclosures from its 2012 Form 10-K.
The company disclosed customer claims and litigation common to the industry, including allegations involving consumer-protection, lending, debt-collection and repossession matters. Six dealers filed individual arbitrations in February 2013 seeking unspecified damages relating to dealer servicing agreements; the company said it would vigorously defend them. An adverse outcome in litigation could materially affect financial condition, liquidity or results. Management reported no off-balance-sheet arrangements with a material current or reasonably likely future effect.
Most important facts for investors to verify
- Whether collection forecasts and allowance assumptions remain supportable, particularly for newer loan vintages and the 2006–2007 cohorts.
- Whether active-dealer growth can offset falling volume per dealer, and how competition affects advance rates, portfolio yield and profitability.
- Actual completion, pricing and proceeds of the anticipated $197.8 Term ABS financing, and borrowing capacity under collateral-based facilities.
- Debt maturities, covenant headroom and funding access; scheduled principal maturities totaled $1,433.8, with $368.1 scheduled in 2014.
- Developments in the dealer arbitrations and consumer litigation, including any change in potential exposure.
- The impact of continued share repurchases: $127.2 was spent in the first nine months of 2013, and 394,770 shares remained authorized for repurchase at September 30.